Britain's biggest retailer warned shareholders that profit growth, which has been achieved with relentless regularity over the last three decades, was likely to come shuddering to a halt next year, as it fights to win back shoppers.s

Analysts said a profit warning of this magnitude was unheard of in living memory and the last time the shares fell this heavily was on Black Monday, during the stock market crash of 1987.

Alongside Tesco's shares falling 16pc, other supermarkets were dragged down as analysts warned this heralded a new era of intense competition for the grocery sector.

The profit warning also brought to a sudden end the slew of benign Christmas trading statements from the retail sector. Tesco's gloomy news was echoed by Argos, Mothercare and Halfords.

Tesco said like-for-like sales fell 2.3pc, excluding petrol and VAT, in the six weeks to January 7. This was a far worse performance than Morrisons, which recorded an increase of 0.7pc, and Sainsbury's, which posted an increase of about 1pc on this basis.

It was also worse than analysts had expected, with most pencilling in a fall of no more than 1pc.

Phil Clarke, the chief executive, who took over from Sir Terry Leahy less than a year ago, said that bargain-hungry shoppers had been lured by coupons and discounts being offered by rival supermarkets.

He insisted that his Big Price Drop campaign, which saw prices at Tesco fall by £500m across thousands of different items had not been a failure, though he added: "we could have done a better job communicating it".

"There was a lot of promotional coupons around Christmas and in hindsight that's where we should have gone harder."

He admitted, however, that Tesco needed to sharpen up its act – not just in the quality and availability of its goods but the service it offered customers.

The company would spend most of this year spending "hundreds of millions" of pounds to fix the supermarkets, Laurie McIlwee, the finance director said. It is likely that not only will more discounts be introduced, but extra staff hired, and fresh food ranges launched.

Analysts predicted this would cause its industry-leading 6.1pc operating profit margins, to slip markedly, possibly by a full percentage point. Philip Dorgan at Panmure Gordon cut his profit forecast for next year by 15pc to £3.88bn.

Clive Black, at Shore Capital, said: "This is not just about price. Too many of the stores have become dated, clinical, sterile."

The company also said that the days of huge out-of-town supermarkets selling lots of non-food were over. Mr Clarke indicated that not only would he stop opening so many of these, but the existing shops would be tweaked to include more food: "Do you need to build large hypermarkets in the UK when the internet is taking so much growth in electricals, in clothing, in general merchandise?", he asked.

Tesco's shares fell 61.55 to 323.45p, while concerns that the industry would be hit by a price war saw J Sainsbury's shares fall by 5.4pc and Wm Morrisons fell by 6pc.